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Performance pay sends salaries into higher orbit

Execs' rewards overshadow raises given typical worker

By David Milstead, Rocky Mountain News (Contact)

Published June 6, 2008 at 3:18 p.m.

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Executive pay continues to increase at a pace far beyond the raises typical workers see in their paychecks.

Last year, the median compensation figure for the 50 best-paid Colorado executives was $7.66 million, a jump of 25 percent from 2006's $6.11 million.

By contrast, the average wage in Colorado in 2007 was roughly $45,000, the Rocky estimates, about 3.5 percent above 2006's figure.

The Rocky tallies pay for this annual survey by counting salary, bonus and other cash payments, plus the value of restricted shares and other long-term compensation plans that are based on the company's stock. Then, we add stock option profits from the prior year.

This year's survey captures a shift in the way companies are paying their leaders. There's a growing emphasis on performance-based stock awards. Stock options, previously the favored form of incentive compensation, are becoming a less-important part of the executive pay package.

In past years, "shareholders embraced options as a way of aligning management's and shareholders' interests; companies embraced them because of their (previously) favorable accounting treatment," said Shirley Westcott, managing director of policy at shareholder-advisory firm Proxy Governance. (The cost of options didn't have to be reflected anywhere in the company's income statement, so it was like giving away free money.)

But, companies needed to issue millions of shares of stock when the options were exercised, so existing shareholders' stakes got diluted.

"And options can also create perverse incentives - bolstering the share price in the short-term to exercise options," Westcott said.

As stock prices collapsed in the early part of this decade, many investors began to sour on options. The Financial Accounting Standards Board then required companies to begin expensing options in 2006, and the shift toward new forms of compensation was on.

Compensation consulting firm Mercer found that among America's 350 biggest revenue-producing companies, long-term performance- based plans were nearly as common as stock options in 2007 compensation. Studies by comp consultants Watson Wyatt and Frederic W. Cook & Co. came to similar conclusions.

"If you look at some of the numbers, it's almost a flat-footed tie," said Donald Sagolla, a Los Angeles- based consultant with Mercer. "It's not that options are going away. The higher up you get, the more you really want the feet to the fire for specific performance."

Still, there is skepticism about the shift. Few believe these new pay plans will reverse the longstanding expansion of executive pay, even if companies turn in mediocre performance.

"More of these stock awards are dependent on meeting performance targets than are option awards, and more are performance-related than at any time in the past," said Paul Hodgson of The Corporate Library, a Portland, Maine-based research firm that's often critical of pay and governance practices. "But in many cases, the performance required to vest in them is not as challenging as shareholders would expect."

Perhaps no company better illustrates the shift to performance- based pay than Liberty Global, an owner of international cable-television systems spun off from John Malone's Liberty Media in 2004.

All five Liberty Global executives named in the company's compensation disclosure are among Colorado's 10 best-paid executives for 2007, thanks entirely to a new stock-based incentive plan the company implemented last year.

The value of awards under Liberty Global's senior executive performance incentive plan last year ranged from $30 million to $55 million for each of the officers, with CEO Michael Fries getting the biggest grant. The plan could pay even more when it concludes next year, the company says.

According to Liberty Global's disclosure, its board used a compensation consultant in late 2006 to conclude that Fries' total possible pay, which included a stock option award, was below the 25th percentile for the company's peers and "was no longer competitive."

Incentive plans

To retain Fries and the other top managers, the company created the incentive plan, setting aside $313.5 million in maximum possible awards. Just 13 participants are eligible for $302.5 million of that. Fries has a maximum possible award of $64 million. Participants in the plan received no other options or stock awards in 2007, and they will not receive any this year, the company said.

Liberty Global will measure operating cash flow growth - "the primary measure used by our board and management to evaluate our operating performance," the company explains to shareholders in it most recent proxy. If it grows at a compound annual rate of 12 percent for 2007 and 2008, adjusted for acquisitions, the awards will begin to kick in. The maximum awards come at 17 percent annual cash-flow growth. (The company said it posted 2007 cash flow growth of 16.2 percent, adjusted downward to reflect acquisitions.)

Liberty Global structured the plan to prevent executives from immediately walking away in 2009 once the goals are met. The company intends to pay out the awards in stock over the three years from 2009 to 2011, but only if the executives stay with the company.

Liberty Global spokesman Rick Westerman said, "The reported stock awards for our executives include the present value of a long- term incentive plan put in place in the second half of 2006 that compensates the team for superior operating performance over a multiyear period. It's worth noting that our stock price was up over 30 percent in calendar 2007 and up over 70 percent since the beginning of 2006, significantly outperforming our peer group over both periods."

Past service rewarded

While Liberty Global's plan may represent the future of executive compensation, many executives are still being rewarded for past service.

Crocs CEO Ron Snyder made nearly $42 million by exercising Crocs stock options in 2007. The company's shares rose during 2007 from $21.60, to $75, before settling in at $36.81. Snyder's options, granted when Crocs was a private company, typically had exercise prices of $1 or less. (Crocs stock has subsequently sunk sharply, to below $10.)

At home builder MDC, shareholders got burned as the stock declined over the year from $55.24 to $36.71. But the company's longtime top two executives, CEO Larry Mizel and President David Mandarich, each made more than $7 million by exercising stock options granted years before.

"There is usually a timing difference between executive actions that result in a rising stock price and the year that options are exercised and option profits are taken," said Peter Miterko, a consultant with Denver Management Advisors.

"It might take two or three years of executive effort to show up in the stock price, and the executive may not exercise until years after that, if the stock price stays buoyant," he said. "Of course, the opposite is also true. Share price might rise in a bull market, even if company performance is worse."

Lucrative years at end

The long-term power of options often means an executive's final years are the most lucrative ones. Typically, the executives exercise bunches of stock options given out over multiple years. On top of that, they collect other types of severance goodies.

Former Qwest CEO Richard Notebaert left the telco in early 2007, but not before exercising $22.2 million in options. He also received just over $8 million in severance pay.

Former Newmont Mining CEO Wayne Murdy made about $4 million in option profits before his midyear retirement. His compensation was boosted instead by $13.2 million in special pension benefits, awarded as part of an employment agreement that gave him extra service time if worked until he was 62.

You don't have to be a CEO to get this treatment, however. Newmont gave former executive Vice President of Operations Thomas Enos $9.25 million in pension benefits in his final year.

Finance Editor David Milstead can be reached at milstead@RockyMountainNews.com or 303-954-2648.

By the numbers

Million-dollar men

Salaries of $1 million or more

* R. David Hoover, Ball Corp. chairman, president and CEO $1,030,000

* Gregory B. Maffei, Liberty Media president and CEO $1,000,000

* Larry A. Mizel, MDC Holdings chairman and CEO $1,000,000

Bonus, baby

Bonus and incentive pay of more than $2 million

* Gary D. Black, Janus Capital Group chief executive officer $6,315,531

* Jonathan D. Coleman, Janus Capital Group EVP and Co-CIO $5,495,867

* R. Gibson Smith, Janus Capital Group EVP and co-CIO $5,373,195

* Mark A. Hellerstein, St. Mary Land and Exploration former president and CEO $3,885,668

* Ronald R. Snyder, Crocs president and CEO $3,200,000

* Gregory B. Maffei, Liberty Media president and CEO $2,650,000

* R. David Hoover, Ball Corp. chairman, president and CEO $2,577,197

* Larry A. Mizel, MDC Holdings chairman and CEO $2,000,000

* David D. Mandarich, MDC Holdings president and COO $2,000,000

* Leo Kiely, Molson Coors Brewing chief executive officer $2,000,000

Lots of options

Executives with option grants valued at $3 million or more

* Gregory B. Maffei, Liberty Media president and CEO $12,406,752

* Edward A. Mueller, Qwest chairman and CEO $8,602,400

* John C. Malone, Liberty Media chairman of the board (former principal executive officer) $4,623,470

* Richard C. Notebaert, Qwest former chairman and CEO $4,548,370

* Ronald R. Snyder , Crocs president and CEO $3,925,390

* Charles Y. Tanabe, Liberty Media executive vice president, secretary and general counsel $3,508,037

Cashing out

Executives who made more than $6 million from stock option profits

* Ronald R. Snyder , Crocs president and CEO $41,797,105

* Richard C. Notebaert, Qwest former chairman and CEO $22,201,901

* Shane O'Neill, Liberty Global senior vice president, chief strategy officer $8,741,843

* Larry A. Mizel , MDC Holdings chairman and CEO $7,530,255

* David D. Mandarich, MDC Holdings president and COO $7,229,901

* Larissa L. Herda, Time Warner Telecom chairman, president, and CEO $6,978,752

* Michael T. Fries, Liberty Global president and CEO $6,650,302

* F.H. Merelli, Cimarex Energy chairman, CEO and president $6,281,250

* David B. Christofferson, Venoco former CFO $6,186,271

Best-paid female executives

Their rank in relation to the Top 50

* 11. Larissa L. Herda, Time Warner Telecom chairman, president and CEO $12,689,918

* 58. Robin C. Beery, Janus Capital Group EVP and chief marketing officer $3,115,531

* 59. Dessa M. Bokides, ProLogis former CFO $3,056,009

* 71. Paula Kruger, Qwest executive vice president, mass markets group $2,510,176

* 79. Martha D. Rehm, Vail Resorts former executive vice president and general counsel $2,279,717

Glossary of terms

* Bonus: Bonuses used to be pretty simple - a cash payment in addition to salary, almost always an award for the company's prior-year performance. Now, companies also disclose "non-equity incentive plan compensation." That is cash given to an executive if the company uses a specific formula or measurable goal to arrive at the amount given. If it's just a bonus for good performance, it's still called a bonus.

* Stock options: Options allow the holder to buy a share of stock for a specific price for a set period, often for 10 years. As the share price rises, the option is worth more.

* Restricted stock: The stock is "restricted" because the executives who receive it can't call their broker and sell their shares immediately. Instead, either time must pass or the company has to hit a certain goal.

In the past, most restricted stock was "time-based," meaning an executive just had to keep working for one to five years to get the shares. Now, more and more companies are issuing "performance-based" shares, which require the company to hit certain financial targets, or "market-based" shares, which require the company's stock price to appreciate.

Comments

  • June 6, 2008

    4:17 p.m.

    Suggest removal

    HolierThanThou writes:

    The economy is tanking, jobs are being eliminated, and while middle Americans are being fleeced executive pay is growing in leaps and bounds.

    Who says there's no way to solve our public deficits and budget shortfalls?

    Smells like money.

  • June 6, 2008

    4:36 p.m.

    Suggest removal

    Oh_Wise_One writes:

    HTH- They earned their pay unlike your welfare cheats that seat on the couch at home watching TV and drinking 40's.
    How much did Rock Stars make last year, let's take their money.
    How much did Pro Baseball players make last year, let's take their money.
    etc.
    How can liberals like Holier be so clueless? Go to school, get a job, work your way up and get paid well.

  • June 6, 2008

    6:05 p.m.

    Suggest removal

    SheikYurBooty writes:

    Oh_W_O - right on!! The median US workers produces about $40,000 a year in value (based on pay). These guys are just about 200 times as productive as the average US employee. It might help some people to understand this with a sports analogy. Let's say the average person could run a mile in 8 minutes (480 seconds). If these guys were 200 time better, they would run that mile in 2.4 seconds. As that example shows, being 200 times better than the average is perfectly normal, everyday, and understandable.

  • June 7, 2008

    7:38 a.m.

    Suggest removal

    jacka writes:

    Is the RMN running this crap to set up for their support of the labor union ballot measures?

    For 20 or 30 years I have seen this crap in the RMN and Post. Yet in most other cities the newspaper(s) do not report this as it is viewed as personal data even though it is public.

    Its not like these people are loafers. I bet most started at entry level positions, made successful decisions for their employers and have worked to get where they are today.

  • June 7, 2008

    8:32 a.m.

    Suggest removal

    jbowen43 writes:

    These guys and gals don't "earn" their salaries. They were just in the right place at the right time when conditions beyond their control made them rich. Unearned income from inheritances, dividends and capital gins should be taxed the same a wages and salaries.

  • June 7, 2008

    10:52 a.m.

    Suggest removal

    DavidMilstead writes:

    I am the author of this piece - just as I was in 2002, and every year since. We do the report annually for no political reason, and the suggestion that other cities' papers do not do it because the information is considered private or personal is flatly wrong. The commenter above shows no track record of having read newspapers in Denver or any other city.

  • June 7, 2008

    12:10 p.m.

    Suggest removal

    mrfxx writes:

    Oh_Wise_One and jacka have bought off on the corporate lie: "Go to school, get a job, work your way up and get paid well." which is absolute garbage in many if not most cases.

    At IBM, many of us were salaried and worked well over 40 hours/week (in both 2006 and 2007 I worked over 2500 BILLABLE hours per year). This year, after having settled a class action lawsuit regarding mandatory overtime (which many of us did not benefit from), the new mandate came down that we would be reclassified as hourly employees - and would get a 15% PAY CUT - which took most of us back to pre-2000 base pay - and told that all we had to do to make up the difference was to work 5 hours OT per week. (While this sounds semi-reasonable, please remember that other benefits are based on base pay, not total pay.) As far as the CEO, since he took over in 2001, he has received annual increases (every year - as opposed to the rank and file, who, since the 1990s, typically receive a 3% raise or LESS every 3-4 years) - his total increases, including bonuses (predominately for selling off the PC division to China and offshoring work to India, Brazil, Argentina, etc) has been over 320% to date. The stock value is stagnant at best (the less than thrilled US-based work force would have fewer complaints if the stock had increased in value 320% - meanwhile, we are watching our jobs go overseas with no reward for our hard work).

    The CEOs and boards of directors are an inbred community: a CEO for company A is often on the board of company B, and are invariably "cherry picked" from a group of "people like us". These people rarely stand to lose anything even if they lower the value of a company. In addition, even if they stay with a company until retirement, they most frequently are given cash payouts at that point, so when a company "dumps" its underfunded (legal technicality - but highly immoral) defined benefits retirement plan on the government and the average employee sees retirement benefits slashed by 2/3 or more, those upper management folks have their "cash in hand".

    As far as comparing CEOs to athletes - that is absolute nonsense. While athletes used to only make about 7-10x what the average worker made (when CEOs were making 20-30x what the workers made), they are the only work force that has any leverage over their employers - who, over the years have chosen to throw those big contracts at the most skilled - then complain about the impact to the cost of team ownership. Unlike athletes, CEO/boards rarely have performance clauses in their contract, nor are CEO/boards "cut" when their performance is bad.

  • June 7, 2008

    5:32 p.m.

    Suggest removal

    jacka writes:

    davidmilstead,
    Please excuse me, I just think the reporting of this data and the context of your story goes to drive home jealous feelings from the 99% of us that don't make more the 100k. Further, I beleive these stories, specifically yours, will be posted on the union and democrat pinboards, blogs, and websites to help drive the radical union agenda at the ballot box.
    Colorado's unions and democrat machine is trying to blackmail business. After unionizing state employees they cannot accept the extention of the Right to Work to all Coloradans. They have attained many of Colorado's elected officals to sign-on to their coalition that 'sells labor peace'. You can count those so called Chambers of Commerce in that coalition too.
    As this is the business section of the RMN, I expect less emotional stories and would appreciate learning more about successful Colorado businesses and their stories. I know it is difficult to get the many private firms to open up, but if they had a reasonable belief that your and the Post paper would not be so hostile to the business community and its values ... you might get more access.
    I recall specifically the Post doing these story types in the late 80's, so yes it has been a regular staple for Denver's print media for 20 or more years. One might ask, what about all those private-held business? Or a more American valued individual would hunker down and try their best to be their best in their choosen vocation.
    As the editor of the business section and I assume an officer of the RMN I would expect you to hold out for business values over radical union driven policies that create higher business costs and less economic value to all Americans.
    Thanks, jacka

  • June 8, 2008

    1:09 p.m.

    Suggest removal

    GetReal writes:

    In the view of most Liberals,

    These guys haven't "earned" anything and are just "lucky" to have won life's lottery.

    Let ambitious people, just compensation ,and the free market work.

  • June 8, 2008

    9:02 p.m.

    Suggest removal

    daRock writes:

    Unlike government, private companies pay an employee what it would cost to replace him/her. That is why CEOs make millions and $45k mid level employees make um......$45k Why pay more for them?

    It really is quite simple.